Crowe Chat Vol.2/2024

Introduction

Effective from 1 January 2022, all types of foreign income received in Malaysia by a resident person is subject to tax. However, Income Tax (No. 6) Order 2022 was gazetted on 19 July 2022 to provide tax exemption on foreign sourced dividend income received in Malaysia by a company / limited liability partnership / individual partner in relation to partnership business from 1 January 2022 until 31 December 2026 subject to the following conditions: 

1. The dividend income has been subjected to tax in the country of origin from which the income arose; 
2. The headline tax rate in the country of origin is not less than 15%; and 
3. Recipient complies with the economic substance requirements.

Amended Income Tax Exemption Order and Amended Guidelines

The Income Tax (Exemption) (No. 6) Order 2022 (Amendment) Order 2024 has been gazetted on 12 June 2024 and the Guidelines on Tax Treatment in Relation to Income Received from Abroad (Amendment) were issued by the Inland Revenue Board of Malaysia (IRBM) on 20 June 2024.

Details of the Amended Income Tax Exemption Order and Amended Guidelines

• The exemption has now been expanded to include a company incorporated under the Labuan Companies Act 1990 and the company has made an election under Section 3A of the Labuan Business Activities Tax Act 1990, i.e. an irrevocable election to be taxed under the MITA. This is deemed to take effect retrospectively from the YA 2022.
• Taxpayers have the option to meet either one of the following groups of conditions to qualify for the tax exemption which is effective from 1 January 2024: 
  Comply with the participation exemption requirements that are:
  1. The dividend income has been subjected to tax in the country of origin; and 
  2. The highest tax rate (headline tax) in the country of origin is not less than 15%: OR 
  Comply with the economic substance requirements.
• The Amended Guidelines issued mentioned that for the purpose of the tax exemption, taxpayers may choose whether to comply with the qualifying condition being participation exemption or economic substance requirements which shall take effect from 1 January 2022.